Pound hits new lows against dollar

As the Bank of England sat down to begin its deliberations on interest rates, the pound tumbled to new three-year lows against the dollar.

Although the City expects rates to be left at 5% at the conclusion of the meeting tomorrow, the risk of lower rates at home and higher rates in the US continued to pressure sterling. It was down more than half a cent at $1.556, its lowest rate since September 1996.

Economist Rob Hayward at Bank of America said: 'The prospect of UK and US rates crossing over has put sterling on the defensive. With the US asset market still strong and more rate increases in the pipeline it all looks pretty positive for the dollar and we could see the rate slip to $1.55.'

Mounting evidence that Britain's economic recovery is gathering pace has prompted City pundits to predict no change in rates on Thursday.

Economist Philip Shaw at Investec said: 'The signs are that manufacturing is recovering, the service sector purchasing managers' index is showing increasing buoyancy and housing transactions are at their highest levels since the 1997 mini-boom. The chances of lower rates look remote.'

Having touched a new low of $1.0185 on Tuesday, the euro held steady above $1.02 in range-bound trade. It was little changed against sterling at 65.52p. German industrial orders defied expectations of a modest fall, rising 0.1% on the previous month in May.